Meridian Annual Report - Meridian Energy

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66 Meridian Energy Limited — Notes to the Financial Statements (continued) a) Market Risk (continued) Group and Parent Impact on After Tax Profit 2008 $’000 2007 $’000 Impact on Equity 2008 $’000 2007 $’000 NZ Dollar/U.S. Dollar -10% - 4 70 3,365 +10% - (3) (58) (2,753) NZ Dollar/Australian Dollar -10% - 43 1,155 43 +10% - (35) (945) (35) NZ Dollar/Japanese Yen -10% - - 1,368 1,198 +10% - - (1,120) (980) NZ Dollar/EURO -10% 1,597 - 27,158 21,441 ii) Cash Flow and Interest Rate Risk +10% (1,307) - (22,220) (17,542) Meridian’s main interest rate risk arises from long term borrowings which are sourced at both fixed interest rates and floating interest rates. In addition, as described in the section above, the combination of foreign denominated borrowings and the CCIRS results in an exposure to floating New Zealand interest rates. Borrowings in floating New Zealand interest rates expose Meridian to cash flow risks whilst borrowings issued at fixed interest rates expose Meridian to risk of changes in the fair value of the debt issued. Meridian does not enter into interest rate hedges for speculative purposes. Meridian manages its interest rate exposure on a net grouped basis by first entering into a number of “fixed to floating” IRS to reflect a floating interest rate exposure for all borrowings and then by fixing interest rates on portions of the borrowings (in relation to both face amounts and tenor) by entering into a number of “floating to fixed” IRS. Interest rate risk is managed on a dynamic basis and various scenarios are simulated taking consideration of existing finance, expected refinancing, existing positions and interest rates and alternative financing and hedging. Meridian considers that the net interest cost to the Group from this approach is less than would be available to the Group if all its borrowings were taken out as fixed NZ debt. Meridian’s policy is to achieve a fixed interest rate exposure for between 60% and 100% of the face value of debt with an age profile of less than one year, and 15% to 60% for debt with an age profile of greater than one year. Meridian does not designate the IRS as hedging instruments and therefore classifies them as held for trading. The aggregate notional principal amounts of the outstanding IRS at 30 June 2008 was $750 million (30 June 2007: $696 million). The table below summarises the impact of increases/decreases in the forward price of interest, as at 30 June, on Meridian’s profit and equity on the assumption that all other variables are held constant. Group and Parent Impact on After Tax Profit 2008 $’000 2007 $’000 Impact on Equity 2008 $’000 2007 $’000 New Zealand BKBM -100 bps (5,564) (13,495) (5,564) (13,495) +100 bps 30,176 19,604 30,176 19,604 The table below analyses Term Borrowings showing by maturity periods the amounts repayable in that period together with a summary of the interest rates on those amounts for the period. Total Face value Group and Parent 1-2 Years 2-5 Years Greater than 5 Years Currency $’000 Interest Rate $’000 Interest Rate $’000 Interest Rate $’000 Term Borrowings: Unsecured Bank Funding NZD 150,000 8.9% 150,000 - - Unsecured Floating Rate Notes AUD 123,000 - 8.3% 123,000 - Fixed Rate Bond Issue USD 581,649 - 4.6% 101,789 5.4% 479,860 Total Term Borrowings 854,649 150,000 224,789 479,860
67< Meridian Energy Limited — Notes to the Financial Statements (continued) a) Market Risk (continued) iii) Price Risk Meridian is exposed to movements in the spot price of electricity arising through the sale and purchase of electricity to and from the market. Meridian manages this exposure by entering into CfD’s to manage the net risk. Meridian does not enter into CfD’s for speculative purposes. The CfD’s include both futures contracts traded on the energy hedge market and bi-lateral CfD’s with other electricity generators and major customers. Meridian estimates both expected generation and electricity purchase requirements and determines its net position of generation less sales. Based on this net position, Meridian enters into CfD’s to protect against price volatility within trading parameters set and monitored by the Board. Although Meridian considers itself economically hedged in relation to electricity price risk, it has decided to meet the requirements to enable it to adopt hedge accounting for only a portion of its CfD’s. Consequently, for accounting purposes, some of the CfD’s are classified as held for trading with movements in fair value recognised in the income statement whilst others are considered as part of an effective cash flow hedge relationship with the effective portion of the gains and losses deferred in a cash flow hedge reserve until the forecast electricity sales/purchases designated as the hedged item are transacted (refer to Note 23 – Derivative Financial Instruments). The aggregate notional volume of the outstanding electricity derivatives at 30 June 2008 is 76,793Gwh. The value of the CfD’s are sensitive to changes in the forward prices for electricity, interest rates and, in the case of one CfD, the aluminium price published on the London Metal Exchange (LME). The table below summarises the impact of increases/decreases in changes to these assumptions as at 30 June on Meridian’s profit and equity, on the assumption that all other variables are held constant and Meridian’s current accounting policies are followed as stated. Post tax profit would increase (decrease) as shown in the table below due to unrealised gains/losses on CfD’s held for trading as well as any potential ineffectiveness for CfD’s in hedge relationships whilst equity would increase (decrease) for all changes in the value of all CfD’s. Group and Parent Impact on After Tax Profit 2008 $’000 2007 $’000 Impact on Equity 2008 $’000 2007 $’000 Electricity Prices -10% 106,612 74 114,794 8,829 +10% (106,612) (74) (114,794) (8,829) Interest Rates -100 bps (37,857) - (38,092) (143) +100 bps 33,169 - 33,398 138 Aluminium LME -10% (37,348) - (37,348) - +10% 37,348 37,348 - b) Credit Risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including derivatives which have a positive value, outstanding receivables and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted. If wholesale customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, risk control assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal or external ratings in accordance with limits set by the Board. The utilisation of credit limits by wholesale customers is regularly monitored by line management. Credit risk surrounding the sales to retail customers is predominately mitigated by the accounts being settled on a monthly basis. Retail credit management continually monitors the size and nature of the exposure and acts to mitigate the risk deemed to be over acceptable levels. The carrying amounts of financial assets recognised in the balance sheet best represents Meridian’s maximum exposure to credit risk at the date of this report. Meridian does not have any significant concentrations of credit risk with any one financial institution.
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Meridian Annual Report for the year
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1< Innovation We launched Right Hou
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2 A time of challenge and opportuni
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4 Chairman’s and Chief Executive
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6 Our Operations Meridian is New Ze
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8 Our Operations cont Under Constru
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10 Generation The winter of 2008 wa
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12 Retail Transforming our customer
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Our Year in Review >14
Page 20 and 21: 16 Our Year in Review cont Our Peop
Page 22 and 23: 18 Our Year in Review cont Meridian
Page 24 and 25: 20 Our Year in Review cont In addit
Page 26 and 27: 22 Our Year in Review cont Meridian
Page 28 and 29: 24 Our Year in Review cont In the M
Page 30 and 31: Our Subsidiaries >26
Page 32 and 33: 28 Board of Directors Wayne Boyd (C
Page 34 and 35: 30 Tim Lusk (Chief Executive) Prior
Page 36 and 37: Financials >32
Page 38 and 39: 34 Economic Overview and 2007/08 Fi
Page 40 and 41: 36 Meridian Energy Limited — Stat
Page 42 and 43: 38 Meridian Energy Limited — Inco
Page 44 and 45: 40 Meridian Energy Limited — Bala
Page 46 and 47: 42 Meridian Energy Limited — Note
Page 88 and 89: 84 Report from the Audit Office Aud
Page 90 and 91: 86 Statutory Information Group Dire
Page 92 and 93: 88 Statutory Information (continued
Page 94 and 95: 90 Meridian Energy Management’s i
Page 96 and 97: 92 Tonnes of CO2 Meridian Energy Ag
Page 98 and 99: 94 Notes on tables Notes on electri
Page 100 and 101: 96 GRI Sustainability Reporting Ind
Page 102: 98 DIRECTORY Registered Office Leve
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Meridian Annual Report - Meridian Energy

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